Every organisation should implement strategic Risk Management to both identify and contain threats to its business model.
Risk Management is a fundamental part of organisational planning and provides a protected environment to distinguishing risks inside a business and creating a risk methodology to mitigate or eliminate those risks. The deployment of an effective Risk Management Framework minimises and maintains the safety of employees whilst safeguarding critical business assets. However, it is also about identifying good risk opportunities but in addition to avoiding or mitigating losses.
Risk Management is recognised as an integral component of financial, operational, and governance management. It is an iterative process consisting of various steps applied to a logical and systematic method of establishing context – identifying, analysing, evaluating, treating, monitoring, and communicating risks – and associated with any activity, function, or process. It is an approach undertaken in sequence but executed to enable organisations to minimise losses and maximise business opportunities, by continual improvement in future decision-making.
What are the objectives of Risk Management?
Ultimately, the goal of Risk Management is to identify potential problems before they occur and have a contingency plan for mitigating risks as they happen. Risk Management covers both internal and external risks that could negatively impact an organisation and its various operational activities.
The objectives of Risk Management are identified by the following points:
- Ensure consistency with risk approach and define risk opportunities.
- Support the achievement of organisational strategic and corporate objectives.
- Provide a high-quality service model to clients, suppliers, and external vendors.
- Initiate immediate action to prevent or reduce the adverse effects of risk.
- Minimise the human costs of risks (but where reasonably practicable).
- Minimise financial risks and other negative consequences of losses and claims.
- Minimise operational risks associated with new products, developments, and activities.
- Make commercially informed decisions and selective choices on possible future outcomes.
- Ensure all statutory and legal obligations are completed (and finalised).
What are the important benefits of Risk Management?
The importance of implementing a Risk Management culture in any organisation cannot be underestimated.
When structured efficiently, the acceptance of Risk Management can create highly profitable operations and improve your compliance with legal, regulatory, and reporting requirements. It provides a greater internal awareness of the risks facing your organisation and your ability to respond effectively. However, what it also provides your business and its employees is an increase in operational efficiency, whilst boosting internal confidence and the ability to achieve your organisation’s strategic objectives.
A Risk Management Programme delivers guidance and many important factors for an organisation’s risk threshold, including the following twelve (12) main benefits:
1. Proactive approach to probable issues and cultural change
Risk Management changes the culture of a business. Organisations that continually focus on Risk Management tend to be more proactive and compared to other organisations who take a less cautious or reactive approach. Thereby, forcing businesses to critique their processes and decide “What can possibly go wrong?” – this detailed ’What-If’ Analysis helps organisations become more proactive and forecasts probable issues.
Organisations that extensively use Risk Management have fewer business disruptions. Risk issues are foreseen, identified, and mitigated at an early stage of the project lifecycle. This proactive approach and continuous feedback is crucial to help identify ‘failed’ projects at the initial Planning Phase. The decisioning process will determine whether an organisation decides to invest additional funds into a potential ‘failed’ project (to make it a success) or whether it is now time to close the project down!
2. Provides high quality data for better decision-making!
Risk Management helps your Executive Management Team obtain high-quality and more accommodating data that reflects all the risks, severity, and expected benefits that the organisation will now realise. This filtered and analysed data helps empowerment to make better decisions and more realistic observations.
Having access to all the risk-related information (real-time), this helps your Executives replan high-risk strategies and execute decisions to ensure the stability of your business. With continuous risk evaluation, Risk Managers can identify risk in the earliest stages by performing Risk Management as part of their role activities – daily, weekly, monthly, quarterly, or annual audits – dependent on tasks identified in the Risk Management Plan.
3. Recognise and manage risks that impact Enterprise-wide
Risk Management enables organisations to work on their capacity to distinguish acceptable and unacceptable risks and establish suitable responses. This diminishes risk surprises and related financial and operational losses, but also allows the business to benefit from risk handling and take imminent advantage of the situation.
Risks can influence many parts of an organisation’s structure. A risk can exist within one (1) area of a business and be contained, however, can affect (unknowingly) another part of the organisation. Therefore, the Risk Management Team will distinguish and deal with these enterprise-wide risks by supporting and further developing execution and performance.
4. Enables growth and recognition of new market opportunities
Risk Management is NOT a defensive business activity because the wording interpretation has a negative connotation and the mindset assumption that the activity is simply performed to avoid financial and operational losses. However, during the phases of Risk Management, organisations become self-aware by re-learning their business model; committed to study their processes and procedures, and their risk factors in detail. Your Executive Management Team starts to become fully aware of the possible scenarios that can, and which will go wrong.
Risk Management enables businesses to take calculated risks and expedite growth success. When new products must be launched or when new market opportunities are presented, organisations have a ready Risk Management Framework that can be deployed by considering both positive and negative parts of risks – Risk Management processes mean that extensive data mining provides meaningful insights, which ultimately leads to better decisions.
5. Minimise losses to remain competitive and market constant!
Risk Management helps organisations to minimise their financial losses at critical times and changing market conditions. These are the many instances whereby poorly managed businesses struggle to stay afloat. However, organisations that have Risk Management processes in place tend to minimise their losses and hence, their competitiveness stays constant but may also improve as well.
It is a known fact that when adverse events such as recessions occur or when extra cash is required to facilitate acquisitions, organisations with better Risk Management practices continue to be competitive during a crisis event. The institutionalising of Risk Management processes also ensures that different departments, as well as different stakeholders must actively communicate and thereby challenge each other’s goals. This communication approach increases the competitive nature of individuals and ultimately rewards the internal workings of an organisation.
6. Maintaining focus and consistency on business results
With effectively evaluating and managing risks, your Team Members can maintain focus on the critical results. This changes the whole mindset of the broader team by improving morale and supports productivity. Risk Management ensures that risks are identified where operational results may not be accomplished, refocusing the team or individual employees on a specific solution.
Consistency comes with clarity and confidence. With constant Risk Management and proper mitigation, the Risk Management Framework in an organisation ensures consistency in its financial, operational, and revenue success. It helps minimise all the risk surprises that a business can experience, and with a smooth and risk-free approach.
7. Identifies areas and scope for process improvement
The normal day-to-day processes of Risk Management forces an organisation to collect more and more cross-functional information about their processes, procedures, and operations. As a direct result, your employees can identify the parts of the process which are inefficient and / or identify where there is scope for improvement. This is known as Business Process Management (BPM).
Risk Management Teams will continuously monitor the workings of various business units or internal departments, in relation to what can go wrong. As a result, during the process monitoring phase there will be opportunities identified and processes streamlined, but improved ways of working. The restructuring of Risk Management processes often works in conjunction with business process re-engineering and Quality Assessment improvements.
8. Increases knowledge insights of financials and budgeting
Organisations that have Risk Management processes in place have better control of their finances. This is because they have a close outlook of their Financial Statements and ensure to rein in excessive costs, minimise spend, and trim any waste. The result is a better knowledge of their financial processes and cashflow forecasting.
For businesses, this determines more insights and a better knowledge of their budgets. They can create more efficient budgets; wherein internal funds can be allocated to achieve the objectives and goals of the organisation.
9. Determines the probability of project success
Knowing the risks associated with every business project helps your Risk Management Plan in determining the probability of success. When Risk Managers identify all possible risks and their severity, your Risk Management Team can easily determine what needs to change and that foresight helps them ensure projects are successfully completed.
Risk Management practices can give context for understanding the performance of a project and contribute to any health checks, peer reviews, or audits.
10. Provides clarity with identifying “risky” projects
The primary purpose behind Risk Management is to identify “risky” projects or the processes within a project that are potential risks and cause project failure. It is because “risky” projects or operational processes increases project costs (and timeframe), which any business wants to avoid.
With proper deployment of a Risk Management Framework and even before starting a new project, an organisation can mitigate all the possible risk factors and proceed with the project, with clarity and purpose in mind.
11. Achieve accurate forecasting of project budget (and actuals)
One of the significant benefits of Risk Management is achieving the forecasted budget set for every business project and activity. After strategically reviewing the setup of a project and before authorisation to commence, every business sets up a budget to accomplish that project.
Risk Management helps evaluate all the necessary factors that might affect the project, the project budget and may require additional costs (and resources). However, these factors are minimised in the initial project stages as contingency budgets can be more accurately estimated. By incorporating Risk Management into schedule planning and cost planning, you can create scenarios for budgeting in terms of extra time, resources, and funds.
12. Timely completion of tasks for client’s satisfaction
What does a business need and always seeks to achieve? Well, of course to make clients happy and excited with your timely delivery of products or services!
With proper Risk Management, a Risk Manager will validate the reasons why any task or equipment that may cause delays in completing the client’s project. With the detailed evaluation and knowledge of each business unit, the Risk Manger’s role is to check the probability of success and failure. Helping the organisation to eliminate all those tasks that may be harmful or unmanageable, so that the overall business operations are more efficient (and timely).
Summary
Risk is the main cause of uncertainty in any organisation. Businesses face many diverse types of risks but will encounter several external and internal risks that can affect their survival and growth.
One of the key factors to a successful organisation is Risk Management and forms part of the lifecycle of a business. It is important because without this process, a business cannot possibly define its objectives for the future. If an organisation defines objectives and goals without taking the risks into consideration, then the chances are that they will lose direction (and focus) once any potential risks affect its core operations.
As a central part of any organisation’s strategic plans, Risk Management is highly beneficial and has proven to improve business performance, efficiency, capabilities, and cost strategy. By implementing a Risk Management Framework, this helps with identifying and addressing risks facing your business and increases the likelihood of successfully achieving your objectives and goals.
Hence, it is important to understand the significance, the principles of Risk Management and implement them effectively to help mitigate the impact of risks on the organisation. With an increasing focus on identifying risks and managing them before they affect business operations, the ability to mitigate and minimise risks will help an organisation act more confidently on its future direction.
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